This paper examines the market pricing of Jones (1991) modelestimated abnormal accruals (often termed “discretionary accruals” in the prior literature) to test whether stock prices rationally reflect the one-year-ahead earnings implications of these accruals. Using the Mishkin (1983) and hedge-portfolio test methods Sloan (1996) employs, I find that the market overestimates the persistence, or one-year-ahead earnings implications, of abnormal accruals, and consequently overprices these accruals. These results extend Subramanyam (1996) by demonstrating that the market not only prices, but also overprices abnormal accruals. They also suggest that the overpricing of total accruals that Sloan (1996) documents is due largely to abnormal accruals. The results are robust to five alternative measures of abnormal accruals, and still hold when I estimate abnormal accruals after controlling for major unusual but largely nondiscretionary accruals. The latter finding is consistent with the notion that the market overprices the portion of abnormal accruals stemming from managerial discretion.

We examine the effect of disclosure requirements on managers' stock repurchase decisions. In 2003, the SEC amended Rule 10b-18, significantly increasing the disclosure requirements for and transparency of stock repurchases for all issuers. While stock repurchases are often used by firms to efficiently return capital to shareholders, they can also be used opportunistically to increase earnings per share. We find that the 2003 SEC amendment enables investors to detect and discount opportunistic repurchases, curtails the extent to which firms use opportunistic repurchases, and reduces or eliminates the negative real effects stemming from opportunistic repurchases (reduced employment, reduced capital expenditures, and reduced R&D expenditures). Our evidence suggests that disclosures aimed at increasing the transparency of firms’ activities can significantly reduce the extent to which firms use these activities opportunistically to manage earnings, thereby reducing the accompanying real consequences of opportunistic behavior.

We investigate the association between errors in management forecasts of subsequent year earnings and current year accruals. In an uncertain operating environment, managers' assessments of their firms' business prospects are imperfect. Since managers' imperfect business assessments influence both accruals generation and earnings projection, we hypothesize that management earnings forecasts exhibit greater optimism (pessimism) when accruals are relatively high (low). Consistent with this hypothesis, we find a positive association between management earnings forecast errors and accruals. This positive association is stronger for firms operating in a more uncertain business environment and for firms in industries exhibiting greater covariation between accruals and growth-related activities. Moreover, this positive association is significant when accruals likely reflect managers' true beliefs about firms' business prospects, but is nonexistent when accruals are likely manipulated to boost managers' trading gains. Supplementary analysis reveals that the presence of management earnings forecasts does not significantly reduce accrual mispricing.

This study provides an explanation for the anomalous significantly negative price-earnings relation using the simple earnings capitalization model for firms that report losses. We hypothesize and find that including book value of equity in the valuation specification eliminates the negative relation. This suggests that the simple earnings capitalization model is misspecified and the negative coefficient on earnings for loss firms is a manifestation of that misspecification. Furthermore, we provide evidence on three competing explanations for the role that book value of equity plays in valuing loss firms. Specifically, we investigate whether the importance of book value in cross-sectional valuation models stems from its role as (1) a control for scale differences (Barth and Kallapur 1996), (2) a proxy for expected future normal earnings (Ohlson 1995; Penman 1992), or (3) a proxy for loss firms' abandonment option (Berger et al. 1996; Barth et al. 1996; Burgstahler and Dichev 1997). Our results do not support the conjecture that the importance of book value in cross-sectional valuation stems primarily from its role as a control for scale differences. Rather, the results are consistent with book value serving as a value-relevant proxy for expected future normal earnings for loss firms in general, and as a proxy for abandonment option for loss firms most likely to cease operations and liquidate.

Firms with a concentrated corporate customer base need to hold more cash and have a stronger incentive to manage earnings upwards. Since tax planning can increase both cash flow and accounting earnings, firms with a concentrated customer base may be more likely to engage in tax avoidance. We find evidence of a positive association between the level of corporate customer concentration and the extent of tax avoidance. In addition, we find that the positive relation between corporate customer concentration and tax avoidance is more pronounced when a firm has a lower Market Share in its industry, enjoys less revenue diversification, and engages less in real earnings management. In contrast to corporate major customers, governmental major customers provide stable cash flow to suppliers, which is likely to alleviate supplier firms’ need for tax avoidance. We find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and that this association is less pronounced under Democratic presidencies. Taken together, our findings indicate that a firm's customer concentration (i.e., corporate and governmental major customers) has a significant effect on the extent to which it avoids taxes.